Stop me if you’ve heard this one before: “There’s a recession every seven years.”
It’s the kind of financial folk wisdom that sounds right but is, in fact, all wrong. But that doesn’t stop influential people from touting it as truth.
Morgan Stanley, for example, was warning investors that the seven-year cycle was a serious risk back in 2015. And they were wrong.
[ad#Google Adsense 336×280-IA]The world’s GDP rose 3.2% in 2015 and 3.1% in 2016, according to the International Monetary Fund.
The US didn’t do too badly, either, growing 2.6% and 1.6% in those years.
So far, 2% looks like an easy target for 2017.
Those aren’t phenomenal numbers, but they’re not anywhere near a recession and, as I wrote in a June 20 article, they signal a great time to buy stocks.
They’re also a far cry from Morgan Stanley’s warning.
“Recessions follow expansions like night follows day,” warned the bank’s chief global strategist of emerging market equities, Ruchir Sharma, at a Bloomberg summit in 2015.
Except they don’t.
Nights follow days at regular intervals governed by the laws of physics. Recessions follow expansions because of human nature, and human nature is impossible to predict. Sharma’s grave warnings from two years ago prove the point.
49 Recessions—and Holding
Where does the seven-year myth come from? Recent history.
In 1969, 1990 and 2008, there were three recessions that were about seven years apart. We also saw a 2001 recession that came a decade after the previous one—close enough to seven years if you’re not looking too closely.
But that’s a misleading selection because we also saw recessions in 1973, 1980 and 1981 that weren’t anywhere near seven years after the preceding one. You could try to fudge the numbers to make them fit, but an even closer look at history shows just how foolish that would be.
Let’s take a look at the full list of every recession in US history:
That’s a long list! In America’s near 250-year history, there has been no shortage of crises and panics. But the good news they’re getting further apart. It’s almost as if the economy is getting more efficient and businesses are getting better at avoiding downturns.
If you lived through 2008, you probably wouldn’t think that things are getting better, but they are. As bad as that crash was, we didn’t have bread lines like we did in the Great Depression; we didn’t have homeless camps in Central Park; and we didn’t have food riots like the Flour Riot of 1837 in New York City.
Of course, things aren’t perfect nowadays, but our downturns tend to be more measured, more controlled and further apart. Take a look at this chart of each recession in US history and the time that elapsed since the previous one:
Notice how the lines tend to get longer over time? That’s because we’re getting smarter about capital markets, fund flows, business cycles and ways to cushion the economy when things get really bad.
That doesn’t mean recessions are destined to happen every seven years, but it does mean that we can expect recessions to be spread even further apart in the future. Maybe some day, recessions will even stop happening altogether.
Life in the Slow Lane
It’s now been eight years since the Great Recession officially ended in June 2009. That isn’t the longest gap we’ve had between recessions (that award goes to the post–dot-com recession of 2001), but I’m betting that the next recession won’t happen until it’s been 10 years since the last one ended. Literally—I’ve got almost my entire nest egg in stocks and corporate bond closed-end funds.
There are a number of reasons why I think the next recession is far off, but they all come from the same starting point: the slow recovery. Whether you call it “the new normal,” as ex-PIMCO bond genius Mohammad Al-Arian does, or you prefer “secular stagnation,” as Harvard professor and ex-presidential advisor Larry Summers does, everyone has noticed an uncomfortable truth about our economy after the Great Recession: it’s recovering at a glacial pace.
That slow improvement is delaying the business cycle. It’s caused companies to stretch out investment and consumers to slow their consumption. It’s also caused overall wage growth following the recession to rise at a very slow rate. That’s not a recessionary trend, but it isn’t a big growth trend either. It’s ho-hum.
And ho-hum is likely what we’re going to see for a few years to come. Again, not great, but not a recession either.
Steady Gains Ahead
What does ho-hum mean for investors? It means lower returns—but no major downfall.
Slowly, investors have begun to realize that this is a good reason to buy stocks. If you’re going to get lower average annualized returns over the next few years because growth is slower, and you’re not going to get a major downturn anytime soon, that means it’s a really good time to buy stocks. (My colleague Brett Owens just outlined 4 great high-yield US stocks paying up to 10.1%.)
But you’re not buying because you’re going to see a massive return in the future. You’re buying because you’re going to see a pretty good return in the future—and no real risks of a major market decline.
Most retail investors haven’t gotten the memo that this is the new reality of investing, but the stock market has. Take a look at the volatility index known as the VIX. Called the “fear gauge,” this is an indicator of just how scared the market is of a major downturn in the near future. And its average has been going down ever since the financial crisis began:
Fear is going down because the market is continually realizing that there are too many safeguards in place, too many checks and balances and too much at stake in the new world economy to let another 2008 happen. That doesn’t mean it won’t, but it does mean it won’t anytime soon.
And without a recession, there’s not going to be a bear market in stocks anytime soon, meaning investors need to buy now and watch their portfolios grow. The only trap in today’s new normal is sitting in cash on the sidelines, where rising inflation will eat up your net worth.
— Michael Foster
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Source: Contrarian Outlook